John Mullins is the start-up’s academic and an authority on entrepreneurship who believes that not every start-up needs to scale its business solely through venture capital.
Mullins, who will be in Ireland to provide a keynote at the Smart Business Show at the RDS on 22 and 23 April, is an associate professor of Management Practice in Entrepreneurship and Marketing at the London Business School.
The award winning teacher has written about entrepreneurship for the Harvard Business Review, the MIT Sloan Management Review and the Wall Street Journal and is the author of a number of critically-acclaimed books, including The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan.
His latest book The Customer-funded Business is a treatise on building valuable companies by primarily pursuing customers to fund new ventures.
The Denver-based academic has also served on the boards of business all over the world.
My first question with Mullins is about whether we are or are not in a tech bubble, one in which current so-called unicorns – start-ups valued in the billions – are leading the charge straight to the abyss.
“I think it is likely that we are in a bubble. But when you are in one nobody knows when they’ll end or how high they’ll go and money will be made during that bubble as prices for assets, in this case the shares of young companies, go higher and higher. What goes up also goes down in the stock market and we just don’t know when.
“I don’t have a sense of when the valuations will fall off but I think it is hard to believe that Airbnb is worth more than any of the largest hotel chains, for example, so we’ll see.”
That said Mullins describes Facebook founder Mark Zuckerberg as a role model who has inspired others to go and do different and interesting things.
“I think that’s really good for our society because it is quite clear that virtually any country in the world today needs jobs and needs them badly and the evidence is quite clear that the real producer of jobs, especially good jobs around the world wherever you are, is almost always a fast growing entrepreneurial company.
“The jobs won't come from the big multinationals who are trying to be more efficient and replace people with machines and they're not going to come solely from start-ups either because start-ups churn so fast, the failure rate is high, so for every one that comes into being there is another one down the street that’s going away.
“The real key for economic development is creating these very fast-growing entrepreneurial companies that can put people to work in varieties of ways. That’s what we have to do economically and that’s what an entrepreneur’s job is and they have a very important role to play in society and we have to clear the way for them.”
If the bubble bursts …
Mullins said that if the current tech bubble does burst, it is not going to slow the pace of innovation. In the worst case scenario it will just interrupt innovation. Remember, Google only figured out its business model at the same time as the last dot.com crash, acquiring YouTube in 2006, a company that didn’t exist a year earlier and which wouldn’t have existed until broadband emerged in the years after the dot.com collapse.
“I don’t anticipate there will be a tech failure, technology will move on and technologies that add value will continue to add value. I think that the damage will come in the financial arena where people will pay too much for assets that weren’t worth as much as they thought.
“Some people will get burned. But that’s the nature of investing and has always been the nature of investing and it shouldn’t surprise people when it happens.
“As Warren Buffett says ‘as the tide goes out we can see who has been swimming naked.’ I don’t think it’s a fundamental problem for the economy or the technology lifecycle, I don’t see it as a fundamental problem.”
While entrepreneurship and start-ups have attracted otherwise non-entrepreneurs into business, I point out that there is a danger of people doing start-ups for lifestyle reasons without having any real conviction that they want to make a difference or solve a problem.
“I think in Ireland there is a strong entrepreneurial culture and I think there has been for some time so I don’t think we’ll see that culture going away. Much of it is IT-based and fortunately the cost of many things around IT has come down so financially it is much easier to start a business today than it was yesterday and a little cheaper yesterday than the day before.
“That’s all good stuff and it means that those that have the passion and the willpower to solve a problem they find – which is what good entrepreneurs do, they find good problems to solve and they solve them – those with the passion and the skills to do that and stay at the task until the problem is solved will continue to build successful businesses.
“But that said, it is not easy to be an entrepreneur and that’s why not everybody succeeds. But I expect it will continue to see high rates of entrepreneurial development, especially in places like Ireland given that the cost of starting a new business is lower than it used to be.
“I think we’ll see more and more entrepreneurs funding their businesses with their customers’ money as I argue I my book The Customer-funded Business, rather than thinking they have to go and raise money from an angel or venture capitalist.
“The angel in the venture capital ecosystem has convinced us over the last couple of generations that a venture capital investor is our first port of call as an entrepreneur and I think that is just wrong and the facts are that most fast-growing companies never raise any venture capital.
“I think people are beginning to understand that is is possible to get a new business underway by solving a compelling customer problem and if you do that the customer will help you fund your business.”
How customers can help you fund your business
Mullins says there are five key ways in which customers can help fund your business
The first is the match-maker model where start-ups like eBay and Airbnb help buyers connect with what they want and these firms usually begin in garages and spare bedrooms. “It is very easy to begin growing such a business at a small level that way to figure out whether it’s going to work as both of those companies did.”
The second one is pay in advance where you simply ask the customer to pay you in advance for what it is you are going to sell them. “That’s what Michael Dell did when he started selling computers from his dorm room at the University of Texas as a college freshman. He convinced small businesses to pay him in advance for a computer he they had not seen.
“People think this is hard, it’s only hard if you don’t have a compelling problem to solve. But if you are solving a compelling problem, the customer will pay you in advance if you can establish your trust.”
The third one is the subscription model. “We’ve been subscribing to things for years and when do we pay those things, well we pay in advance of those subscriptions and whatever the goods and services are they are delivered over time. Again the customer’s money comes first and that can fund the genesis of the business.”
Then there are also scarcity models where you limit the quantity and the time for what it is you are going to sell. “By doing that and getting good supplier terms you have the customer’s money in hand before you have to pay your suppliers and the customer can fund your start.”
The fifth and final model is the conversion of a services business into a products business.
“What Bill Gates and Paul Allen figured out was after you do the same kind of service many times over they could turn the service into a product. They figured out that if they wrote one operating system correctly as a one size fits all then they can bottle it and sell it as a product and not as a service. When you do that it becomes vastly more scalable and that’s where Microsoft created its shareholder value.
“It is surprising how many businesses can be started exactly that way.”
Seeing around corners
Mullins said the qualities of good entrepreneurs are manifold but they come down to a similar set of things.
“They have to see opportunity. They have to be able to look around the corner and imagine where the next real need is among a segment of consumers that they themselves can solve. That’s one critical thing, because if you can’t spot a good opportunity you are not going to build a good business.
“A second one is the capacity to lead and inspire other people, to gather a team including suppliers and customers and bring together the resources you need to pursue that opportunity. Those are the two key skill sets and the good thing is that both of those things can be learned.
“They aren’t just born, we can learn those things and people do.”
While Mullins advocates growing and funding through customers, he believes there is a time and a place for investment in order to seize the moment and accelerate. Again, this comes down to realism, solving a problem and meeting a demand.
“Investors want to invest in somebody that is solving a compelling customer problem and where that somebody or the team of somebodys has done so before. Investors want to reduce the risk and the way they do that is asking has this team delivered on this kind of opportunity before?
“But ultimately they want to see if you have identified a genuine and compelling customer problem that needs to be solved. No investor will pay to solve a non-problem, that’s not going to happen.
“It is really the job of the entrepreneur to beg, borrow or steal the resources they need to get the need for capital down long enough so then the amount of stake they have to give away is modest.
“With a customer funded business ideally you get that down to zero and you get that money from customers instead of investors.”
A shot at success
Mullins says he is always being asked at the London Business School if is it possible to teach entrepreneurship or are certain abilities ingrained.
“I guess it is our view that you can’t just pick up anybody walking down the street, dip them in the secret sauce and out they come an entrepreneur. But on the other hand, the entrepreneurial path is so well understood today.
“The best we can do is help anybody with the passion an entrepreneur needs and a willingness to work hard, to be open to ambiguity and uncertain futures. If you have a person like that you can help that person better travel the entrepreneurial path by teaching him or her the lessons that others have helped us learn. I think it is quite clear that entrepreneurship can be taught and can be learned, not just something that is inbred.”
But successful entrepreneurs are also team players. “It is almost like a team sport, you need somebody on the team who can convince fledgling customers to give your product or service a try or find a key supplier to do business with, but not everybody on the team has to do that, that’s why you need teams.
“You need somebody who can keep the ships running on time, somebody who can have the vision and really understand where the business is going to go and what problem it is the business wants to solve and you need somebody to have the commercial instincts and ability to convince others to come on board.
“Teams will get formed around good ideas and when those ideas are good and solve a real problem, those teams have a shot at success.”
John Mullins will be a keynote speaker at the upcoming Smart Business Show at the RDS on 22 and 23 April